Washington,
☒
for the quarterly period ended June 30, 2017,2018, or
☐
for the transition period from ______________ to _____________.
Commission File No. 000-52211
| 001-34528 | ||
| (Commission File Number) | ||
| Delaware | 20-2559624 | |||||
| (State or other jurisdiction of | (I.R.S. Employer Identification No.) | |||||
910 West Legacy Center Drive, Suite 500
Midvale, Utah 84047
| 910 West Legacy Center Way, Suite 500 Midvale, Utah 84047 | ||
(801) 263-0699
| (801) 263-0699 | ||
¨ Large Accelerated Filer | þ Accelerated Filer | ||||||
¨ Non-accelerated Filer | ¨ Smaller Reporting Company | ||||||
¨ Emerging Growth Company | |||||||
ZAGG INC AND SUBSIDIARIES
(LOSS) follows: six months ended June 30, 2017. Additionally, there were no impairments to intangible assets for the three months ended June 30, 2017. The following Six months ended June 30, On April 11, 2017, the Company received a final court order stating that the claims of one of its patents were either The estimated fair value of the restricted stock units is recognized on a straight-line basis over the requisite service period of the award, which is generally the vesting term of the award. During the three and six months ended June 30, 2018, the Company recorded stock-based compensation expense related to restricted stock units of $807 and $1,408, respectively. During the three and six months ended June 30, 2017, the Company recorded stock-based compensation expense related to restricted stock units of $966 and $1,636, operations. 2018. 2017: For the three and six months endedJune 30, Leases SEC Investigation follows: Three months ended June 30, Six months ended June 30, 2016 June 30, December 31, On July mophie Products report except for the implementation of certain estimates for revenue recognition under Topic 606 as disclosed below. Results of Operations These increases were partially offset by a decrease in sales of power cases. approximately as follows: approximately as follows: approximately as follows: on mophie-branded products. strategy, and the inclusion of global intangible low taxed income and the corresponding foreign tax credit. The percentage of net sales related to our key product lines for the six months ended June 30, 2018 and 2017, approximately as follows: approximately as follows: approximately as follows: mophie-branded products. strategy, and the inclusion of global intangible low taxed income and the corresponding foreign tax credit. 2017. thousands facilities, (2) purchases of treasury shares, (3) purchase of property and equipment, and (4) payments for the net share settlement of restricted stock. operating activities. ended June 30, 2018. Accounts payable decreased to of 2017 with an associated reduction of expenditures during the six months ended June 30, 2018. liabilities to non-current liabilities. In addition, others processes and controls are currently being implemented as part of the ongoing remediation.PART I - FINANCIAL INFORMATIONPageCONTENTS PAGE 1926262727272727Item 1.Financial Statements. June 30, December 31, 2017 2016 ASSETS Current assets: Cash and cash equivalents $ 14,330 $ 11,604 Accounts receivable, net of allowances of $784 in 2017 and $824 in 2016 72,956 83,835 Inventories 65,376 72,769 Prepaid expenses and other current assets 3,717 3,414 Income tax receivable 1,193 2,814 Total current assets 157,572 174,436 Property and equipment, net of accumulated depreciation of $21,856 in 2017 and $18,371 in 2016 15,631 17,755 Goodwill 12,272 12,272 Intangible assets, net of accumulated amortization of $60,555 in 2017 and $55,298 in 2016 45,327 53,362 Deferred income tax assets 49,331 50,363 Other assets 1,541 2,541 Total assets $ 281,674 $ 310,729 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 62,237 $ 85,022 Accrued liabilities 22,798 22,216 Sales returns liability 27,794 28,373 Accrued wages and wage related expenses 5,635 6,169 Deferred revenue 209 273 Line of credit 30,683 31,307 Current portion of long-term debt, net of deferred loan costs of $65 in 2017 and 2016 6,185 10,484 Total current liabilities 155,541 183,844 Noncurrent portion of long-term debt, net of deferred loan costs of $108 in 2017 and $141 in 2016 10,829 9,623 Total liabilities 166,370 193,467 Stockholders' equity: Common stock, $0.001 par value; 100,000 shares authorized; 34,047 and 33,840 shares issued in 2017 and 2016, respectively $ 34 $ 34 Additional paid-in capital 94,207 92,782 Accumulated other comprehensive loss (1,270 ) (2,114 ) Treasury stock, 6,065 and 5,831 common shares in 2017 and 2016 respectively, at cost (37,637 ) (36,145 ) Retained earnings 59,970 62,705 Total stockholders' equity 115,304 117,262 Total liabilities and stockholders' equity $ 281,674 $ 310,729 June 30, 2018 December 31, 2017 ASSETS Current assets: Cash and cash equivalents $ 18,582 $ 24,989 Accounts receivable, net of allowances of $431 and $734 83,990 123,220 Inventories 69,662 75,046 Income tax receivable 1,285 — Prepaid expenses and other current assets 5,463 4,547 Total current assets 178,982 227,802 Property and equipment, net of accumulated depreciation of $14,212 and $12,540 12,532 13,444 Goodwill 12,272 12,272 Intangible assets, net of accumulated amortization of $72,253 and $66,639 33,630 39,244 Deferred income tax assets 23,914 24,403 Other assets 3,846 3,426 Total assets $ 265,176 $ 320,591 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 60,372 $ 96,472 Income tax payable — 2,052 Accrued liabilities 6,838 8,168 Sales returns liability 34,620 34,536 Accrued wages and wage related expenses 5,836 5,652 Deferred revenue — 315 Current portion of line of credit — 23,475 Current portion of long-term debt, net of deferred loan costs of $0 and $141 — 13,922 Total current liabilities 107,666 184,592 Non-current portion of line of credit 20,000 — Total liabilities 127,666 184,592 Stockholders' equity: Common stock, $0.001 par value; 100,000 shares authorized; 34,423 and 34,104 shares issued 34 34 Additional paid-in capital 94,977 96,145 Accumulated other comprehensive loss (1,028) (348) Treasury stock, 6,247 and 6,065 common shares at cost (40,643) (37,637) Retained earnings 84,170 77,805 Total stockholders' equity 137,510 135,999 Total liabilities and stockholders' equity $ 265,176 $ 320,591 1 Three Months Ended Six Months Ended June 30,
2017 June 30,
2016 June 30,
2017 June 30,
2016 Net sales $ 115,227 $ 99,833 $ 208,173 $ 162,266 Cost of sales 79,403 68,960 143,743 107,664 Gross profit 35,824 30,873 64,430 54,602 Operating expenses: Advertising and marketing 2,070 2,275 5,076 5,189 Selling, general and administrative 24,952 24,880 52,006 44,635 Transaction costs 300 305 515 2,322 Impairment of intangible asset - - 1,959 - Amortization of long-lived intangibles 3,005 4,765 6,026 7,511 Total operating expenses 30,327 32,225 65,582 59,657 Income (loss) from operations 5,497 (1,352 ) (1,152 ) (5,055 ) Other income (expense): Interest expense (619 ) (604 ) (1,110 ) (792 ) Other income (expense) 67 9 48 (191 ) Total other expense (552 ) (595 ) (1,062 ) (983 ) Income (loss) before provision for income taxes 4,945 (1,947 ) (2,214 ) (6,038 ) Income tax benefit (provision) (1,542 ) 901 (521 ) 1,703 Net income (loss) $ 3,403 $ (1,046 ) $ (2,735 ) $ (4,335 ) Earnings (Loss) per share: Basic earnings (loss) per share $ 0.12 $ (0.04 ) $ (0.10 ) $ (0.16 ) Diluted earnings (loss) per share $ 0.12 $ (0.04 ) $ (0.10 ) $ (0.16 ) Three Months Ended Six Months Ended June 30, 2018 June 30, 2017 June 30, 2018 June 30, 2017 Net sales $ 118,565 $ 115,227 $ 230,631 $ 208,173 Cost of sales 80,908 79,403 155,381 143,743 Gross profit 37,657 35,824 75,250 64,430 Operating expenses: Advertising and marketing 2,638 2,070 5,233 5,076 Selling, general and administrative 27,035 24,952 51,342 52,006 Transaction costs 18 300 18 515 Impairment of intangible asset — — — 1,959 Amortization of intangible assets 2,773 3,005 5,545 6,026 Total operating expenses 32,464 30,327 62,138 65,582 Income (loss) from operations 5,193 5,497 13,112 (1,152) Other income (expense): Interest expense (346) (619) (846) (1,110) Other (expense) income (681) 67 (186) 48 Total other expense (1,027) (552) (1,032) (1,062) Income (loss) before provision for income taxes 4,166 4,945 12,080 (2,214) Income tax provision (951) (1,542) (1,835) (521) Net income (loss) $ 3,215 $ 3,403 $ 10,245 $ (2,735) Earnings (loss) per share attributable to stockholders: Basic earnings (loss) per share $ 0.11 $ 0.12 $ 0.36 $ (0.10) Diluted earnings (loss) per share $ 0.11 $ 0.12 $ 0.36 $ (0.10) 2(LOSS) Three Months Ended Six Months Ended June 30,
2017 June 30,
2016 June 30,
2017 June 30,
2016 Net income (loss) $ 3,403 $ (1,046 ) $ (2,735 ) $ (4,335 ) Other comprehensive income (loss), net of tax: Foreign currency translation (loss) gain 556 (284 ) 844 35 Total other comprehensive income (loss) 556 (284 ) 844 35 Comprehensive income (loss) $ 3,959 $ (1,330 ) $ (1,891 ) $ (4,300 ) Three Months Ended Six Months Ended June 30, 2018 June 30, 2017 June 30, 2018 June 30, 2017 Net income (loss) $ 3,215 $ 3,403 $ 10,245 $ (2,735) Other comprehensive (loss) gain, net of tax Foreign currency translation (loss) gain (970) 556 (680) 844 Total other comprehensive (loss) income (970) 556 (680) 844 Total comprehensive income (loss) $ 2,245 $ 3,959 $ 9,565 $ (1,891) 3 Six Months Ended June 30,
2017 June 30,
2016 Cash flows from operating activities Net loss $ (2,735 ) $ (4,335 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation 1,636 2,291 Excess tax benefits related to share-based payments - (566 ) Depreciation and amortization 11,022 14,568 Loss on disposal of property and equipment 13 - Deferred income taxes 1,040 (43 ) Amortization of deferred loan costs 120 81 Impairment of intangible asset 1,959 - Changes in operating assets and liabilities, net of acquisition: Accounts receivable, net 11,350 5,666 Inventories 8,130 1,104 Prepaid expenses and other current assets (298 ) 1,859 Other assets 912 (210 ) Income taxes receivable 1,622 (1,095 ) Accounts payable (23,116 ) (8,506 ) Accrued liabilities 1,073 (202 ) Accrued wages and wage related expenses (1,083 ) 12 Deferred revenue (64 ) 69 Sales returns liability (625 ) (7,274 ) Net cash provided by operating activities 10,956 3,419 Cash flows from investing activities Purchase of property and equipment (net of amounts acquired) (3,065 ) (4,700 ) Proceeds from disposal of equipment 31 - Purchase of mophie, net of cash acquired - (74,743 ) Net cash used in investing activities (3,034 ) (79,443 ) Cash flows from financing activities Payment of debt issuance costs - (1,144 ) Proceeds from revolving credit facility 205,897 142,477 Payments on revolving credit facility (206,521 ) (92,471 ) Proceeds from term loan facility - 25,000 Payments on term loan facility (3,125 ) (1,563 ) Purchase of treasury stock (1,492 ) - Payment of withholdings on restricted stock units (240 ) (621 ) Proceeds from exercise of warrants and options 29 54 Excess tax benefits related to share-based payments - 566 Net cash provided by (used in) financing activities (5,452 ) 72,298 Effect of foreign currency exchange rates on cash equivalents 256 (26 ) Net increase (decrease) in cash and cash equivalents 2,726 (3,752 ) Cash and cash equivalents at beginning of the period 11,604 13,002 Cash and cash equivalents at end of the period $ 14,330 $ 9,250 Supplemental disclosure of cash flow information Cash paid during the period for interest $ 953 $ 566 Cash paid (refunded) during the period for taxes, net $ (2,322 ) $ 834 Six Months Ended June 30, 2018 June 30, 2017 Cash flows from operating activities: Net income (loss) $ 10,245 $ (2,735) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Stock-based compensation 1,408 1,636 Depreciation and amortization 9,230 11,022 Deferred income tax expense 481 1,040 Loss on disposal of property and equipment 9 13 Loss on deferred loan costs with debt modification 243 — Amortization of deferred loan costs 106 120 Impairment of intangible asset — 1,959 Changes in operating assets and liabilities: Accounts receivable, net 37,318 11,350 Inventories 5,080 8,130 Prepaid expenses and other current assets 503 (298) Other assets (563) 912 Accounts payable (34,480) (23,116) Income tax (payable) receivable (3,512) 1,622 Accrued liabilities (1,404) 1,073 Sales returns liability (5,092) (625) Accrued wages and wage related expenses 153 (1,083) Deferred revenue — (64) Other 232 — Net cash provided by operating activities 19,957 10,956 Cash flows from investing activities: Purchase of property and equipment (2,701) (3,065) Proceeds from disposal of equipment 26 31 Net cash used in investing activities (2,675) (3,034) Cash flows from financing activities: Payment of deferred loan costs (294) — Proceeds from revolving credit facility 198,761 205,897 Payments on revolving credit facility (214,215) (206,521) Payments on term loan facility (2,084) (3,125) Purchase of treasury stock (3,006) (1,492) Payment of withholdings on restricted stock units (2,610) (240) Proceeds from issuance of stock under employee stock purchase plan 55 29 Net cash used in financing activities (23,393) (5,452) Effect of foreign currency exchange rates on cash equivalents (296) 256 Net (decrease) increase in cash and cash equivalents (6,407) 2,726 Cash and cash equivalents at beginning of the period 24,989 11,604 Cash and cash equivalents at end of the period $ 18,582 $ 14,330 4Supplemental schedule of noncash investing and financing activitiesFor the Six Months Ended June 30, 2017:Purchase of $560 in fixed assets financed through accounts payable.For the Six Months Ended June 30, 2016:Purchase of $1,234 in fixed assets financed through accounts payable.Six Months Ended June 30, 2018 June 30, 2017 Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 926 $ 953 Cash paid (refunded) during the period for taxes, net $ 4,683 $ (2,322) Supplemental disclosure of non-cash investing and financing activities: Purchase of fixed assets financed through accounts payable $ 541 $ 560 Withholdings tax on restricted stock units recorded in accrued wages and wage related expenses $ 21 $ — Modification of debt that resulted in payment of existing term loan balance $ 11,991 $ — 5(1)NATURE OF OPERATIONS AND BASIS OF PRESENTATIONZAGG®ZAGG,ZAGG®, InvisibleShield®, mophie®, and IFROGZ® brands.20162017 Annual Report on Form 10-K. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the full year.On March 3, 2016, the Company acquired mophie inc. ("mophie"). The results of operations of mophie are included in the Company's results of operations beginning on March 3, 2016. Based on the manner in which the Company manages, evaluates, and internally reports its operations, the Company determined that mophie will be reported as a separate reportable segment. See Notes 3 and 13 for additional details on the acquisition and the Company's reportable segments.The condensed consolidated financial statements include the accounts of ZAGG Inc and its wholly owned subsidiaries ZAGG International Distribution Limited (“ZAGG International”); Patriot Corporation; ZAGG Intellectual Property Holding Co, Inc. (“ZAGG IP”); ZAGG Retail, Inc; ZAGG Netherlands B.V.; ZAGG Mobile Accessories Australia Pty Ltd; mophie inc.; mophie LLC; mophie Technology Development Co., Ltd; mophie Netherlands Coöperatie U.A.; and mophie Limited. All intercompany transactions and balances have been eliminated in consolidation.2016.Recent Accounting Pronouncements (amounts2017. Except for the changes below, the Company has consistently applied the accounting policies to all periods presented in thousands)In May 2014, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standard Update (“ASU”) No. 2014-09, “Revenuethese consolidated financial statements.Customers (Topic 606).” This ASU includesCustomers" five-step process by which entities will recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which an entity expects to be entitled in exchange for those goods or services. The ASU also will require enhanced disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The ASU may be adopted utilizing one of two methods. The first method is to adopt the ASU by recording the effect of the guidance in the ASU retrospectively to each prior period presented in the period of adoption. The second method is to adopt the ASU by recording the effect of the guidance in the ASU retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application. On July 9, 2015, the FASB voted to approve a one-year deferralapplication of the effective date of this ASU. This deferral was issued by the FASB in ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606) – Deferral of the Effective Date”.January 1, 2018. As a result of ASU No. 2015-14this adoption, the Company expects that it will apply the newhas changed its accounting policy for revenue standard to annual and interim reporting periods beginning after December 15, 2017. In May 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606) – Narrow-Scope Improvements and Practical Expedients”. The amendments and practical expedients presented in the ASU aim to simplify the transition to the new standard, to provide practical expedients for transition and sales taxes, and to clarify certain aspects of the standard. recognition as detailed below.currently anticipates adopting the standardapplied Topic 606 on January 1, 2018, using the modified retrospective approach, with the cumulative effect of adopting the new standard being recognized in retained earnings at January 1, 2018. Therefore, the prior period comparative information has not been adjusted and continues to be reported under Topic 605. The adoption of Topic 606 resulted in an increase in accounts receivable of $115; an increase in prepaid expenses and other current assets of $1,255 for the recognition of the right of return assets; an increase in accrued liabilities of $314; an increase in sales return liability of $5,250 for the recognition of the sales return liability on a gross basis and for the change in estimating refund liabilities under Topic 606; a decrease in deferred revenue of $314; and a decrease of $3,880 in retained earnings as a cumulative effect of adoption. The largest driver of changes for the adoption of Topic 606 was the change in estimate for price concessions offered to end customers. Under Topic 605, price concessions to end customers were recognized when such incentives were explicitly offered to the end customer, whereas under Topic 606 such incentives are estimated and recorded at the datetime of initial application. the sale of products to the Company’s customers.Reported as of June 30, 2018 Adjustments as of June 30, 2018 Balances Without Adoption of Topic 606 as of June 30, 2018 Condensed consolidated balance sheet changes: Accounts receivable, net of allowances $ 83,990 $ (384) $ 83,606 Prepaid expenses and other current assets 5,463 (1,140) 4,323 Accrued liabilities 6,838 (164) 6,674 Sales returns liability 34,620 (3,748) 30,872 Deferred revenue — 164 164 Retained earnings 84,170 2,224 86,394 Reported for the Three Months Ended June 30, 2018 Adjustments for the Three Months Ended June 30, 2018 Amounts Without Adoption of Topic 606 for the Three Months Ended June 30, 2018 Condensed consolidated statements of operations changes: Net sales $ 118,565 $ 661 $ 119,226 Cost of sales 80,908 (114) 80,794 Reported for the Six Months Ended June 30, 2018 Adjustments for the Six Months Ended June 30, 2018 Amounts Without Adoption of Topic 606 for the Six Months Ended June 30, 2018 Condensed consolidated statements of operations changes: Net sales $ 230,631 $ 2,050 $ 232,681 Cost of sales 155,381 (174) 155,207 currently evaluatingexpected to be returned and resold. Historical experience, actual claims, and customer return rights are the impactkey factors used in determining the ASU will have on its consolidated financial statements.estimated sales returns, discounts, and other credits.6June 30, 2018 Receivables, which comprises the balance in accounts receivable, net of allowances $ 83,990 Right of return assets, which are included in prepaid expenses and other current assets 1,140 Contract liabilities, which are included in accrued liabilities 164 Refund liabilities, which are included in sales return liability 30,633 Warranty liabilities, which are included in sales return liability 3,987 In July 2015,The current balance of the FASB issued ASU No. 2015-11, “Simplifyingright of return assets is the Measurementestimated amount of Inventory.” This ASU provides guidanceinventory to entitiesbe returned that measure inventory usingis expected to be resold. The current balance of contract liabilities primarily relates to the advance consideration received from customers for products for which transfer of control has not yet occurred, and therefore recognition of revenue is deferred until the transfer of control. The current balance of refund liabilities is the expected amount of sales returns, discounts and other credits from sales that have occurred.method other than last-in, first-out (LIFO)fulfillment activity after control over products have transferred to the customer. For product sales, our standard shipping terms are FOB shipping point, and we record revenue when the product is shipped, net of estimated returns and discounts. Shipping and handling costs are included in cost of sales.the retail inventory method. For entities using first-in, first-out (FIFO) or average cost, the measurement principleless and (ii) contracts for their inventory changes from the lower of cost or market to lower of cost and net realizable value. Current U.S. GAAP requires, at each financial statement date, that entities measure inventorywhich we recognize revenue at the loweramount to which we have the right to invoice for services performed.cost or market. revenue from contracts with customersmeasurementpercentage of market is commonlynet sales related to our key product lines for the current replacement cost. However, entities also needthree and six months ended June 30, 2018 and 2017, was approximately as follows:Three Months Ended Six Months Ended June 30, 2018 June 30, 2017 June 30, 2018 June 30, 2017 Screen Protection 54 % 51 % 52 % 49 % Power Management 27 % 17 % 30 % 17 % Power Cases 7 % 19 % 6 % 21 % Keyboards 7 % 5 % 6 % 6 % Audio 4 % 7 % 5 % 6 % Other 1 % 1 % 1 % 1 % considerour key distribution channels for the three and six months ended June 30, 2018 and 2017, was approximately as follows:Three Months Ended Six Months Ended June 30, 2018 June 30, 2017 June 30, 2018 June 30, 2017 Indirect channel 88 % 89 % 88 % 88 % Website 8 % 7 % 8 % 9 % Franchisees 4 % 4 % 4 % 3 % realizable valuesales related to our key geographic regions for the three and net realizable value less ansix months ended June 30, 2018 and 2017, was approximately normal profit margin in their measurement. For entities using a method other than LIFO or the retail inventory method, the ASU replaces market with net realizable value. This ASU requires prospective adoption for inventory measurement for annual and interim periods beginning after December 15, 2016 for public business entities. The Company has concluded that this ASU did not have a material impact on our financial position or results of operations.In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes,” which requires entities with a classified balance sheet to present all deferred tax assets and liabilities as noncurrent. The amendments in the ASU may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The ASU is effective for public business entities for interim and annual periods in fiscal years beginning after December 15, 2016. During the year ended December 31, 2016, the Company adopted the ASU using the retrospective approach resulting in recording deferred tax assets as non-current for current and prior periods presented. This adoption does not impact our results of operations.Three Months Ended Six Months Ended June 30, 2018 June 30, 2017 June 30, 2018 June 30, 2017 United States 85 % 87 % 83 % 86 % Europe 10 % 8 % 10 % 8 % Other 5 % 5 % 7 % 6 % , which requires lessees to recognize most leases, including operating leases, on-balance sheet via a right of use asset and lease liability. Lessees are allowed to account for short-term leases (i.e., leases with a term of 12 months or less) off-balance sheet, consistent with current operating lease accounting. A number of other significant changes to lease accounting have been effected through the issuance of this standard. The requirements of the new standard for leases shall be recognized and measured at the beginning of the earliest comparative period presented. When adopted, the Company will be required to adjust equity at the beginning of the earliest comparative period presented, and the other comparative amounts disclosed for each prior period presented in the financial statements, as if the requirements of the new standard had always been applied. The new standard also contains practical expedients which the Company may elect to follow. The new standard is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements, including whether to elect the practical expedients outlined in the new standard.In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which simplified accounting for share-based payments. The ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those years for public business entities. Early adoption is permitted in any interim or annual period provided that the entire ASU is adopted. The new standard contains several amendments that simplify the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements, classificationawards as either equity or liabilities, and classification on the statement of cash flows. The changes in the new standard eliminate the accounting for excess tax benefits to be recognized in additional paid-in capital and tax deficiencies recognized either in the income tax provision or in additional paid-in capital. The Company has adopted ASU 2016-09 as of the beginning of the quarter ended March 31, 2017. During the quarter ended March 31, 2017, the Company applied the amendment relating to the recognition of excess tax benefits and deficiencies on a prospective basis and, accordingly, has recognized all excess tax benefits and tax deficiencies as income tax expense or benefit as discrete items resulting in the recognition of income tax expense of $171 for the six months ended June 30, 2017. The Company has not recorded a cumulative-effect adjustment to retained earnings as of the beginning of thePrior Year Presentationbecause all tax benefits had previously been recognized when the tax deductions related to stock compensation were utilized to reduce taxes payable. The Company has elected to apply the amendment related to the presentation of cash flows for excess tax benefits on a prospective basis and no prior periodsamounts have been adjusted. The Company’s financial position or results of operations were not impacted by amendments related to the statutory tax withholding requirement and, accordingly, no adjustment has been recorded. The Company will continue to classify cash remitted to the tax authorities as a financing activity as now required by the amendments in the ASU. The ASU permits a policy election to either record forfeitures as they occur or estimate forfeitures consistentreclassified for consistency with historical U.S. GAAP. The Company has elected to record forfeitures as they occur, which did not have a material impact on our financial position or results of operations.7In August 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments,” which addresses eight classification issues related to the statement of cash flows: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon bonds; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle. The ASU is effective for public business entities for fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. The amendments in the ASU should be applied using a retrospective transition method to each period presented. If it is impracticable for the amendments to be applied retrospectively for some of the issues, the amendments for those issues may be applied prospectively as of the earliest date practicable. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements, including the method of adoption.In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory,” which requires entities to recognize at the transaction date the income tax consequences of intercompany asset transfers other than inventory. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash,” which requires companies to include cash and cash equivalents that have restrictions on withdrawal or use in total cash and cash equivalents on the statement of cash flows. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which requires an entity to no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured using the difference between the carrying amount and the fair value of the reporting unit. The ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2019. All entities may early adopt the standard for goodwill impairment tests with measurement dates after January 1, 2017. The Company performs an annual goodwill impairment assessment and will elect to early adopt this standard in the current year when the assessment is performed. The Company is currently evaluating the impact this ASU will havepresentation. These reclassifications had no effect on its consolidated financial statements.In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718),” which clarifies what constitutesreported results of operations. A reclassification has been made with a modification of$2,347 reduction to accrued liabilities and a share-based payment award. This ASU is effective for all entities for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.
$2,347 increase to sales returns liability.8(2)INVENTORIES2017,2018 and December 31, 2016,2017, inventories consisted of the following: June 30,
2017 December 31, 2016 Finished goods $ 65,084 $ 72,490 Raw materials 292 279 Total inventories $ 65,376 $ 72,769 June 30, 2018 December 31, 2017 Finished goods $ 69,410 $ 74,734 Raw materials 252 312 Total inventories $ 69,662 $ 75,046 20172018 and December 31, 20162017, of $957$1,783 and $437,$1,906, respectively.(3)ACQUISITION OF MOPHIE INC.On February 2, 2016, ZAGGZM Acquisition, Inc. (“Merger Sub”), a Delaware corporationno impairments of intangible assets for the three and wholly-owned subsidiary of the Company, entered into an Agreement and Plan of Merger (the “Merger Agreement”) with mophie, a California corporation, the principal shareholders of mophie named therein (the “Principal Shareholders”), and Daniel Huang as representative of the mophie shareholders, warrant holders, and option holders, pursuant to which Merger Sub agreed to merge with and into mophie, with mophie continuing as the surviving corporation (the “Merger”). On March 3, 2016 (the “Acquisition Date”), the Company completed the Merger.Results of OperationsThe results of operations of mophie are included in the Company’s results of operations beginning on March 3, 2016. For the period March 3, 2016, throughsix months ended June 30, 2016, mophie generated net sales of $39,6592018. There were also no additions to intangible assets for the three and a net loss before tax of $13,727.Pro forma Results from Operationsunaudited pro-forma resultstable summarizes the impairments of operationsgross intangible assets for the six months ended June 30, 2016 give pro forma effect as if the acquisition had occurred at the beginning of the period presented, after giving effect to certain adjustments including the amortization of intangible assets, interest expense, tax adjustments, specific transaction related expenses incurred prior to the execution date, and assumes the purchase price was allocated to the assets purchased and liabilities assumed based on their values at the date of purchase.
2016 Net sales $ 179,592 Net loss $ (7,155 ) Basic loss per share $ (0.25 ) Diluted loss per share $ (0.25 ) The unaudited pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred had the transaction been consummated for the dates indicated. Furthermore, such unaudited pro forma information is not necessarily indicative of future operating results of the combined companies, due to changes in operating activities following the purchase, and should not be construed as representative of the operating results of the combined companies for any future dates or periods.For the six months ended June 30, 2016, pro forma net loss includes projected amortization expense of $4,412. In addition, the Company included interest from the new credit facility and amortization of debt issuance costs for the six months ended June 30, 2016 of $1,007. Material non-recurring adjustments excluded from the pro forma financial information above consists of the $6,937 step up of mophie inventory to its fair value, which was recorded as an unfavorable adjustment to cost of goods sold during the six months following the acquisition date.9December 31, 2016 $ 108,659 Impairment loss on patent (2,777) June 30, 2017 $ 105,882 The unaudited pro forma results do not reflect events that either have occurred or may occur after the Merger, including, but not limited to, the anticipated realization of ongoing savings from operating synergies in subsequent periods.(4)GOODWILL AND INTANGIBLE ASSETSGoodwillThere were no additions to nor impairment of goodwill for the quarter-ended June 30, 2017. The balance of goodwill as of June 30, 2017 was $12,272.Long-lived Intangible AssetsThe following table summarizes the changes in gross long-lived intangible assets:Gross balance at December 31, 2016 $ 108,659 Impairment loss on patent (2,777 ) Gross balance at June 30, 2017 $ 105,882 unpatentablenot patentable or cancelled.canceled. Accordingly, management determined that the patent’s carrying value was not recoverable through future cash flows and was impaired as of March 31, 2017. Consequently, for the six months period ended June 30, 2017, the Company recorded an impairment loss to intangible assets consisting of a reduction of gross carrying amount of $2,777, accumulated amortization of $818, and net carrying value of $1,959 to reduce the net carrying value of the cancelledcanceled patent to $0.Long-lived intangible20172018 and December 31, 2016,2017, were as follows: June 30,
2017 December 31,
2016 Customer relationships $ 11,935 $ 14,612 Tradenames 19,680 21,506 Patents and technology 12,377 15,727 Non-compete agreements 1,317 1,497 Other 18 20 Total amortizable intangible assets $ 45,327 $ 53,362 (5)INCOME TAXESJune 30, 2018 December 31, 2017 Customer relationships $ 6,921 $ 9,259 Trade names 16,256 17,854 Patents and technology 9,486 10,981 Non-compete agreements 958 1,137 Other 9 13 Total intangible assets, net of accumulated amortization $ 33,630 $ 39,244 months ended June 30, 2017 and 2016, was 31.2% and 46.3%, respectively. The Company’s effective tax for the six months ended June 30, 2017 was 31% and 2016, was (23.5%) and 28.2%(24)%, respectively. The change in the effective tax rate for the three-month periodthree months ended June 30, 2018 compared to the three months ended June 30, 2017 was primarily due to several factors including but not limited to a change in the federal statutory rate from 35% to 21% and an increase to income in lower rate foreign jurisdictions in which the company has losses in the prior year.jurisdictions. The change in the effective tax rate for the six months ended June 30, 2018 compared to the six months ended June 30, 2017 was primarily due to several factors including but not limited to a discrete expense recognized duringchange in the period relatedfederal statutory rate from 35% to 21%, a change to book income in the true upsecond quarter of a deferred amount for stock compensation and close2018 compared to break-even pre-taxa book loss in the current year.second quarter of 2017, and an increase to income from foreign jurisdictions. The Company’s effective tax rate will generally differ from the U.S. Federal statutory rate of 35%21%, due to state taxes, permanent items, and the Company’s global tax strategy.(6)FAIR VALUE MEASURESFair Valuestrategy, and the inclusion of Financial InstrumentsAt June 30, 2017,global intangible low taxed income and the Company’s financial instruments included cash and cash equivalents, accounts receivable, accounts payable, a line of credit, and a term loan. The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximates fair value due to the short-term maturities of these financial instruments. The carrying value of the debt balances approximate fair value because the variable interest rates reflect current market rates.
corresponding foreign tax credit.10Fair Value MeasurementsThe Company measures at fair value certain financial and non-financial assets by using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price, based on the highest and best use of the asset or liability. The levels of the fair value hierarchy are:Level 1 — Quoted market prices in active markets for identical assets or liabilities;Level 2 — Significant other observable inputs (e.g., quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs other than quoted prices that are observable such as interest rate and yield curves, and market-corroborated inputs); andLevel 3 — Unobservable inputs in which there is little or no market data, which require the Company to develop its own assumptions.At June 30, 2017, and December 31, 2016, the following assets were measured at fair value on a recurring basis using the level of inputs shown: Fair Value Measurements Using: June 30,
2017 Level 1
Inputs Level 2 Inputs Level 3 Inputs Money market funds included in cash equivalents $ 5 $ 5 — — Fair Value Measurements Using: December 31,
2016 Level 1
Inputs Level 2 Inputs Level 3 Inputs Money market funds included in cash equivalents $ 5 $ 5 — — (7)DEBT AND LINE OF CREDIT20172018 and December 31, 2016,2017, was as follows: June 30,
2017 December 31, 2016 Line of credit $ 30,683 $ 31,307 Term loan 17,014 20,107 Total debt outstanding 47,697 51,514 Less current portion 36,868 41,791 Total long-term debt outstanding $ 10,829 $ 9,623 (8)STOCK-BASED COMPENSATIONJune 30, 2018 December 31, 2017 Line of credit $ 20,000 $ 23,475 Long-term debt, net of deferred loan costs of $0 and $141 — 13,922 Total debt outstanding 20,000 37,397 Current portion of total debt outstanding, net of deferred loan costs of $0 and $141 — 37,397 Total long-term debt outstanding $ 20,000 $ — 2016,2018, the Company granted 380 and 713 restricted stock units, respectively. The restricted stock units granted duringwere estimated to have a weighted-average fair value per share of $11.65 and $12.48, respectively. During the three and six months ended June 30, 2017, the restricted stock units granted were estimated to have a weighted-average fair value per share of $6.35 and $6.57, respectively. The restricted stock units granted during the three and six months ended June 30, 2016 were estimated to have a weighted-average fair value per share of $5.40 and $7.33, respectively. The fair value of the restricted stock units granted is based on the closing share price of the Company’s common stock on the date of grant. The restricted stock units vest annually on a straight-line basis over a nine-month (annual board of directors’ grant) to a three-year vesting term, depending on the terms of the individual grant.and 713 grants discussed above,restricted stock units granted during the first six months ofended June 30, 2018 and 2017, and 2016, the Company granted 372167 and 418372 restricted stock units, respectively, to certain executives and employees of the Company where vesting is linked to specific performance criterion. TheThese performance-based restricted stock units granted in 2017 and 2016 only vest upon the (1) Company’s achievement of specified thresholds of net sales, Adjusted EBITDA, or specific goals for the individual executive. As of June 30, 2017,executive, and (2) continued employment through the Company believes it is probable that it will achieve the targets for all restricted stock units granted in the first six months of 2017. Of the 418 restricted stock units granted in 2016, 29 shares vested and 150 shares were forfeited, and 239 have not yet vested or been forfeited.
applicable vesting date.11respectively, whichrespectively. Stock-based compensation expense related to restricted stock is included as a component of selling, general, and administrative expense. Duringexpense on the three and six months ended June 30, 2016, the Company recorded stock-based compensation expense related to restricted stock unitscondensed consolidated statement of $957 and $2,291, respectively, which is included as a component of selling, general, and administrative expense20172018 and 2016,2017, certain ZAGG employees elected to receive a net amount of shares upon the vesting of restricted stock unit grants in exchange for the Company paying up to the maximum statutory withholding amount of the employees’ tax liabilities for the fair value of the award on the vesting date. This resulted in the Company payingrecording $2,631 and $240 and $621, respectively, which is reflected as a reduction of additional paid-in capital. We also recognized an increasecapital, respectively. Of the $2,631 recorded as a reduction of additional paid-in capital,$21 was included in accrued wages and wage related to the employee stock purchase planexpenses as of $29 for the six months ended June 30, 2017. There was an immaterial impact to additional paid-in capital related to the employee stock purchase plan for the six months ended June 30, 2016.(9)EARNINGS (LOSS) PER SHARE20172018 and 2016: Three months ended June 30,
2017 June 30,
2016 Net income (loss) $ 3,403 $ (1,046 ) Weighted average shares outstanding: Basic 27,963 28,126 Dilutive effect of restricted stock units and warrants 250 --- Diluted 28,213 28,126 Earnings (loss) per share: Basic $ 0.12 $ (0.04 ) Diluted $ 0.12 $ (0.04 ) Six months ended June 30,
2017 June 30,
2016 Net loss $ (2,735 ) $ (4,335 ) Weighted average shares outstanding: Basic 28,010 27,918 Dilutive effect of restricted stock units and warrants — — Diluted 28,010 27,918 Earnings (loss) per share: Basic $ (0.10 ) $ (0.16 ) Diluted $ (0.10 ) $ (0.16 ) Three Months Ended Six Months Ended June 30, 2018 June 30, 2017 June 30, 2018 June 30, 2017 Net income (loss) $ 3,215 $ 3,403 $ 10,245 $ (2,735) Weighted average shares outstanding: Basic 28,299 27,963 28,254 28,010 Dilutive effect of restricted stock units 367 250 425 — Diluted 28,666 28,213 28,679 28,010 Earnings (loss) per share: Basic $ 0.11 $ 0.12 $ 0.36 $ (0.10) Diluted $ 0.11 $ 0.12 $ 0.36 $ (0.10) 2017, there were no warrants or2018, 114 restricted stock units excluded from the calculation of diluted earnings per share. For the three months ended June 30, 2016, warrants and restricted stock unitswere used to purchase shares of common stock totaling 895 were not considered in calculating the diluted earnings per share as their effect would have been anti-dilutive.For the six months ended June 30, 2017 and 2016, warrants and restricted stock units to purchase shares of common stock totaling 980 and 895, respectively,that were not considered in calculating diluted earnings per share, respectively, as their effect would have been anti-dilutive.12(10)TREASURY STOCK, 2017, 0 and 980 restricted stock units were used to purchase shares of common stock that were not considered in calculating diluted earnings (loss) per share, respectively, as their effect would have been anti-dilutive.purchased 0 and 234repurchased 182 shares of ZAGG Incthe Company's common stock, respectively.stock. Cash consideration paid for the purchasenoted share repurchases was $3,006, which included commissions paid to brokers of ZAGG Inc common stock for$7. For the three and six months ended June 30, 2018, the weighted average price per share repurchased was $16.49. The consideration paid has been recorded within stockholders’ equity in the condensed consolidated balance sheet.$6.32.$6.35. The consideration paid has been recorded within stockholders’ equity in the condensed consolidated balance sheet.For the three and six months ended June 30, 2016, no purchases of treasury stock occurred.(11)COMMITMENTS AND CONTINGENCIESleasesmall cart locationsa retail store location under operating leases that expire through 2023.2025. Future minimum rental payments required under the operating leases at June 30, 20172018, were as follows:Remaining 2017 $ 1,457 2018 2,177 2019 1,714 2020 1,529 2021 1,455 Thereafter 2,584 Total $ 10,916 Remaining 2018 $ 1,075 2019 2,880 2020 2,744 2021 2,448 2022 2,508 Thereafter 4,053 Total operating lease commitments $ 15,708 and 2016, rent expense was $758 and $939, respectively, and was included in selling, general and administrative expense in the condensed consolidated statement of operations.$1,443, respectively. Rent expense iswas recognized on a basis which approximates straight-line over the lease term and was recorded as a component of selling, general and administrative expense on the condensed consolidated statement of operations.For the six months ended June 30, 2017 and 2016, rent expense was $1,443 and $1,656, respectively, and was included in selling, general and administrative expense in the condensed consolidated statement of operations. Rent expense is recognized on a basis which approximates straight-line over the lease term and was recorded as a component of selling, general and administrative expense on the condensed consolidated statement of operations.Daniel Huang, individually and as shareholder representative v. , Court of Chancery of the State of Delaware, C.A. No. 12842. On October 21, 2016, Daniel Huang, as the representative of the mophie, inc. shareholders, under the Merger Agreement dated February 2, 2016, by and among the Company, ZM Acquisition, Inc. and mophie, inc.Inc. v. Anker Technology Co. Ltd. and Fantasia Trading LLC, United States District Court for the Central District of California, Case No. 8:17-CV-2193-DOC-DFM (the “Anker Lawsuit”). On December 15, 2017, ZAGG and mophie filed a lawsuit against the CompanyAnker Lawsuit alleging that the Company breached the Merger AgreementAnker Technology Co. Ltd. (“Anker”) and Fantasia Trading LLC (“Fantasia”) infringe U.S. Patent Nos. 8,971,039, 9,077,013, 9,088,028, 9,088,029, 9,172,070, and 9,406,913 in connection with protective battery cases for smartphones. The Anker products accused of infringement include Anker’s Ultra Slim Extended Battery Case for iPhone 6 / 6s (4.7 inch) with 2850mAh capacity; Premium Extended Battery Case for iPhone 6 / 6s (4.7 inch) with 3100mAh Capacity; PowerCore Case for iPhone 7 (4.7 inch), 80% Extra Battery; and PowerCore Case for iPhone 7 (4.7 inch), 95% Extra Battery. The complaint filed by failing to pay certain contingent payments (the “Contingent Payments”) related to tax refundsZAGG and customs duty recoveriesmophie seeks monetary damages and seeking damages in an amount no less than $11,420.injunction against Anker. On December 16, 2016, the CompanyMarch 12, 2018, Anker and Fantasia filed an Answeranswers and Counterclaimscounterclaims in the lawsuit. In its Answer, the Company acknowledges its obligation under the Merger Agreement to make the Contingent Payments under certain circumstances, but avers that this obligation is subject to rights of offsettheir answers, Anker and recoupment, each of which applies to Huang’s claims. In its Answer, the Company denies that any payments are due at this time or that it is in breachFantasia denied infringement of any provisionvalid claim and asserted counterclaims for non-infringement and invalidity of the Merger Agreement. Regarding the Counterclaims, after the closing of the merger, ZAGG discovered breaches of certain representations, warranties and covenants made by Huang and mophie that have resulted in damages exceeding $22,000. In addition to these breaches, the Company has also discovered that mophie fraudulently misrepresented or omitted facts related to (i) a certain product return program, resulting in a substantial overstatement of the value of mophie’s inventory and understatement of mophie’s sales return reserve, (ii) breaches of contracts by Huang and certain other former employees of pre-merger mophie, and (iii) certain intellectual property belonging to mophie that was misappropriated by Huang and other former employees of pre-merger mophie. In its Counterclaims, the Company asserts claims based on these facts against Huang and certain other indemnitors for breaches of representations, warranties and covenants in the Merger Agreement, fraudulent concealment and declaratory judgment. On February 6, 2017, Huang filed a Motion to Dismiss the Counterclaims. On March 28, 2017, ZAGG filed its Answer in Opposition to Huang’s Motion to Dismiss. On July 18, 2017, Huang filed a Motion for Summary Judgement. The Court of Chancery will schedule a hearing in the future on Huang’s Motion to Dismiss and Motion for Summary Judgment. patents at issue.recorded a liability based on its estimate ofdisputes Anker’s contentions and will defend the Contingent Payments as part of purchase accounting.claims and otherwise respond to the allegations. The Company will accruematter is scheduled for future Contingent Payments, including tax refunds, proceeds received on the land held for sale, and customs duty recoveries as they are collected.trial in November 2019. This matter is not expected to have a material adverse effect on the Company’s financial position, results of operations, or liquidity.13ZAGG Inc et al. v. Daniel Huang et al., Orange County Superior Court, State of California, Civil No. 30-2016-00892767-CU-BC-CJC. On December 15, 2016, the Company and mophie filed a complaint against Daniel Huang and Immotor, LLC (“Immotor”). The complaint alleges that Huang and the company he founded, Immotor, misappropriated confidential information belonging to mophie while Huang was serving as an officer and director of mophie. Based on these allegations, mophie asserts claims for breach of contract, trade secret misappropriation in violation of California Civil Code § 3426 et seq., breach of fiduciary duty, and conversion, and the Company asserts claims against Huang for breaches of his employment agreement, inventions agreement, separation agreement and consulting agreement. On February 28, 2017, Huang and Immotor filed a Demurrer to the Complaint filed by ZAGG and mophie. ZAGG and mophie opposed the Demurrer, and on June 13, 2017 the Orange County Superior Court entered an order overruling the Demurrer in its entirety. On June 22, 2017, Huang and Immotor filed an Answer to the Complaint asserting a general denial of all allegations. ZAGG and mophie served Huang and Immotor with a trade secret disclosure on July 19, 2017, as is required of a plaintiff in a trade secret case under California’s civil rules. ZAGG and mophie also served discovery requests on this date. Huang and Immotor’s responses to those requests are due on August 24, 2017. This matter is not expected to have a material adverse effect on the Company’s financial position, results of operations, or liquidity.Peter Kravitz v. ZAGG Inc., U.S. Bankruptcy Court, District of Delaware, Adv. Pro. No. 15-51558(BLS).On October 29, 2015, Kravitz, as Liquidating Trustee (the “Trustee”) of the RSH Liquidating Trust (formerly known as RadioShack) filed a complaint against the Company, alleging, among other things, that the Company received preference payments for product the Company sold and delivered to RadioShack in the amount of $1,834 pursuant to Section 547 of the Bankruptcy Code and in the alternative pursuant to Section 548 of the Bankruptcy Code. The case was settled by the Company in April 2017. The settlement amount was not considered material to the Company’s financial position, results of operations, or liquidity.Eric Stotz and Alan Charles v. mophie inc., U.S. District Court, Central District of California, Civil Action No. 2:16-cv-08898-GW-FFM. On January 13, 2017, Eric Stotz and Alan Charles, individually and on behalf of a purported class, filed a first amended class action complaint alleging that they purchased certain external battery packs and that the battery packs did not extend the life of the phones’ internal batteries as advertised and adversely affected the phones’ internal battery life. Plaintiffs allege violations of California’s unfair competition law, California’s Consumer Legal Remedies Act, New York’s unlawful deceptive acts and practices statute, and New York’s false advertising law. The Company has denied all liability and will defend the claims and otherwise respond to the allegations. This matter is not expected to have a material adverse effect on the Company’s financial position, results of operations, or liquidity. MobileExp, LLC v. mophie inc., U.S. District Court, Eastern District of Texas, Civil Action No. 2:16-cv-1340.On November 30, 2016, MobileExp, LLC filed a lawsuit alleging that Mophie Space Pack for the iPhone 5S, 5, 6, 6 Plus, and iPad Mini infringed on certain claims of U.S. Patent No. 8,879,246. The Company has denied all liability and filed a counterclaim alleging that the claims of U.S. Patent No. 8,879,246 are invalid. On February 23, 2017, Civil Action No. 2:16-cv-1340 was consolidated with 2:16-cv-1339, the latter being the lead case. On June 9, 2017, the claims and counterclaims between MobileExp, LLC and the Company were dismissed with prejudice.SEC’sSEC's Salt Lake City office. The Company believes the investigation includes a review of the facts and circumstances surrounding former Chief Executive Officer Robert Pedersen’sPedersen's pledge and subsequent sale of Company shares and the fact that such pledges and sales were not disclosed in the Company’sCompany's 2011 10-K filed on March 15, 2012, or 2012 Proxy filed on April 27, 2012. The Company responded to these requests and is cooperating with the staff although there has been no resolution to date.Other than those discussed above, theThe Company has not accrued for any loss atas of June 30, 2017,2018, in the condensed consolidated financial statements as the Company does not consider a loss to be probable or estimable. The Company faces contingencies that are reasonably possible to occur; however, the reasonably possible exposure to losses cannot currently be estimated.14(12)CONCENTRATIONSsuchcash accounts throughfor the six months ended June 30, 2018 and 2017.from two separate customers exceeded 10%: Superior Communications, Inc. (“Superior”) and Best Buy Co., Inc. (“Best Buy”). GENCO Distribution Systems, Inc. (“GENCO”) exceeded 10% of accounts receivable as of December 31, 2016, but not as of June 30, 2017. At June 30, 2017, the balance of accounts receivable from two separate customers exceeded 10%: June 30,
2017 December 31, 2016 Superior 38 % 32 % Best Buy 14 % 22 % GENCO 8 % 10 % June 30, 2018 December 31, 2017 Superior Communications, Inc. (“Superior”) 43 % 31 % Best Buy Co., Inc. (“Best Buy”) 14 % 18 % 2017,2018 or December 31, 2016.2017. If one or more of the Company’s significant customers were to become insolvent or were otherwise unable to pay for the products provided, it would have a material adverse effect on the Company’s financial condition and results of operations.the last ninemany years. Our film supplier has contractually agreed to not sell the raw materials to any of our competitors.●Screen Protection – Our screen product line is comprised of sales of InvisibleShield glass products, InvisibleShield film products, and ISOD film blanks. InvisibleShield glass products are sourced from factories in Asia with protective glass expertise, each of which uses a number of sub-suppliers for raw materials and other components. Our InvisibleShield film and ISOD products are sourced through our third-party logistics partner, who purchases the raw film inventory from a single supplier (as discussed above).●Battery Cases and Power Management – Our battery case and power management product lines consists of power products that are designed to provide on-the-go power for tablets, smartphones, MP3 players, cameras, and virtually all other electronic mobile devices. Our power products are sourced from factories in Asia with battery expertise, each of which uses a number of sub-suppliers for raw materials and other components.●Keyboards– Our keyboard product line consists of (1) device-specific keyboards designed to fit individual tablets produced by original equipment manufacturers and (2) keyboards that are designed to be device agnostic and can be used on virtually any mobile device. Our keyboard products are sourced from factories in Asia with keyboard expertise, each of which uses a number of sub-suppliers for raw materials and other components.●Audio– Our audio product line consists of earbuds and headphones that are designed to be compatible with virtually all electronic mobile devices. Our audio products are sourced from factories in Asia with audio expertise, each of which uses a number of sub-suppliers for raw materials and other components.15and 2016, Superior was our largest customer which accounted for over 10% of net sales; GENCO also accounted for over 10% of net sales, while for the three months ended June 30, 2016, as follows:
2017 Three months ended June 30,
2016 Superior 31 % 27 % GENCO 8 % 12 % For the six months ended June 30, 2017, and 2016, Superior and GENCO were our largest customers with each accounting for over 10% of net sales; Best Buy also accounted for over 10% of net sales, foras follows:Three Months Ended Six Months Ended June 30, 2018 June 30, 2017 June 30, 2018 June 30, 2017 Superior 34 % 31 % 31 % 29 % Best Buy 11 % 9 % 10 % 8 % GENCO 3 % 8 % 4 % 10 % 2016, as follows:
2017 Six months ended June 30,
2016 Superior 29 % 24 % GENCO 10 % 11 % Best Buy 8 % 10 % During2018 and 2017, and 2016 no other customers accounted for greater than 10% of net sales. of our retailers generally purchase from us on a purchase order basis. As a result, these retailers generally may, with little or no notice or penalty, cease ordering and selling our products, or materially reduce their orders. If any of these retailers cease selling our products, slow their rate of purchase of our products, or decrease the number of products they purchase, our results of operations could be adversely affected.months ended June 30, 2017 and 2016, was approximately: 2017 2016 United States 87 % 90 % Europe 8 % 6 % Other 5 % 4 % The percentage of net sales by geographic region for the six months ended June 30, 20172018 and 2016,2017, was approximately: 2017 United States 86 % 89 % Europe 8 % 7 % Other 6 % 4 % (13)SEGMENT REPORTINGThe Company designs, produces, and distributes professional and premium creative product solutions in domestic and international markets. The Company’s operations are conducted in two reporting business segments: ZAGG and mophie. The Company defines its segments as those operations whose results its chief operating decision maker regularly reviews to analyze performance and allocate resources. The results of operations of mophie are included in the Company’s results of operations beginning on March 3, 2016.16Three Months Ended Six Months Ended June 30, 2018 June 30, 2017 June 30, 2018 June 30, 2017 United States 85 % 87 % 83 % 86 % Europe 10 % 8 % 10 % 8 % Other 5 % 5 % 7 % 6 % The ZAGG segment designs and distributes screen protection, keyboards for tablet computers and other mobile devices, earbuds, headphones, Bluetooth speakers, mobile power, cables, and cases under the ZAGG, InvisibleShield, and IFROGZ brands. Domestic operations are headquartered in Midvale, Utah, while international operations are directed from Shannon, Ireland.The mophie segment designs and distributes power cases, mobile power, cases, and cables under the mophie brand. Worldwide operations are headquartered in Tustin, California, while international operations are directed from Shannon, Ireland.The Company measures the resultsits segments using, among other measures, each segment’s net sales, gross profit, and operating income (loss).Net sales by segment were as follows: Three months ended June 30,
2017 Three months ended June 30,
2016 ZAGG segment $ 74,259 $ 67,810 mophie segment 40,968 32,023 Net sales $ 115,227 $ 99,833 Six months ended June 30,
2017 Six months ended June 30,
2016 ZAGG segment $ 131,424 $ 122,607 mophie segment 76,749 39,659 Net sales $ 208,173 $ 162,266 Gross profit by segment were as follows: Three months ended June 30,
2017 Three months ended June 30,
2016 ZAGG segment $ 27,790 $ 26,645 mophie segment 8,034 4,228 Gross profit $ 35,824 $ 30,873 Six months ended June 30,
2017 Six months ended June 30,
2016 ZAGG segment $ 52,093 $ 49,465 mophie segment 12,337 5,137 Gross profit $ 64,430 $ 54,602 Income (loss) from operations by segment were as follows: Three months ended
June 30,
2017 Three months ended
June 30,
2016 ZAGG segment $ 9,177 $ 8,288 mophie segment (3,680 ) (9,640 ) Income (loss) from operations $ 5,497 $ (1,352 )
BRAVEN17 Six months ended June 30,
2017 Six months ended June 30,
2016 ZAGG segment $ 10,216 $ 8,701 mophie segment (11,368 ) (13,756 ) Loss from operations $ (1,152 ) $ (5,055 ) Total assets by segment were as follows:
2017
2016 ZAGG segment $ 141,192 $ 156,123 mophie segment 140,482 154,606 Total assets $ 281,674 $ 310,729 (14)SUBSEQUENT EVENTS17, 2017, ZAGG Inc, KeyBank National Association (“KeyBank”), ZB, N.A. dba Zions First National Bank (“Zions Bank”), and JPMorgan Chase Bank, N.A. (collectively,20, 2018, the “Lenders”), and KeyBank, as the administrative agent for the Lenders,Company entered into a Third Amendment Agreement (“Amendment”), which amendsand closed an asset purchase agreement to acquire the original CreditBRAVEN brand, inventory, intellectual property, accounts receivable, product and Security Agreement dated as of March 3, 2016 byengineering team, and among the Company, KeyBank, KeyBanc Capital Markets Inc., Zions Bank,certain other assets and the other lenders party thereto, as amended byliabilities for $5,000. BRAVEN products that certain First Amendment Agreement dated as of May 31, 2016include rugged Bluetooth® speakers and that certain Second Amendment Agreement dated as of March 8, 2017 (collectively, the “Credit Agreement”), to:●Increase the Maximum Revolving Amount, as defined in the Credit Agreement, from $85,000 to:○$135,000 from July 17, 2017 to December 31, 2017;○$110,000 million from January 1, 2018 to May 31, 2018; and○$100,000 from June 1, 2018 forward.●Expand Permitted Foreign Subsidiary Loans, Guaranties and Investments, as defined in the Credit Agreement, to include:○A $2,000 loan dated April 5, 2017 from the Company to ZAGG International Distribution Limited; and○Any other loan or investment by the Company or any domestic subsidiary of the Company in or to, or guaranty of indebtedness of, any foreign subsidiary of the Company for the period July 17, 2017 to March 31, 2018, in an aggregate amount not to exceed $8,000.●Increase the Letter of Credit Commitment, as defined in the Credit Agreement, from $7,500 to an aggregate amount of $40,000.●Increase the Borrowing Base, as defined in the Credit Agreement, on a seasonal basis between August 1, 2017 and September 30, 2017 by $15,000.In connection with the Amendment, the Company also entered into replacement revolving credit notes with each of the Lenders. As consideration for entering into the Amendment, the Company agreed to pay the administrative agent and Lenders total amendment and arrangement fees of $145, pursuant to the terms of an administrative agent fee letter and a closing fee letter entered into with KeyBank. The changes to the Credit Agreement described above were made to support core-business opportunities.
earbuds.18ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSaffecteffect on our operations and future prospects include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC.Company’s commitmentCompany is committed to enhance every aspect of performance, productivity and durability in mobile devices with creative product solutions. ZAGG was created from the concept of applying a clear film originally designed to protect military-helicopter blades in harsh desert conditions to protect consumers’ mobile devices. Mobile devices are essential to modern living and ZAGG’s mission is to ensure better performance in the real world.ZAGG, InvisibleShield, mophie,ZAGG®, InvisibleShield®, mophie®, and IFROGZIFROGZ® brands.Drive,Way, Suite 500, Midvale, UT,Utah 84047. The telephone number of the Company is 801-263-0699.(801) 263-0699. Our website addresses arewww.ZAGG.com andwww.mophie.com. The (the URLs are included here in this report as inactive textual references. Informationreferences and information contained on, or accessible through, our websites is not a part of, and is not incorporated by reference into, this report.
report).19
Corporate ObjectivesCore ValuesCorporate Objectives Core Values The Preferred Brand Integrity Creative Product Solutions Ownership Targeted Global Distribution Care for People Operational Excellence Passion Continuous Improvement Performance Sense of Urgency herhis or hisher role in executing to these objectives. Each core value acts as a key component in working toward ZAGG’s corporate objectives of providing creative product solutions, executing targeted global distribution, achieving operational excellence, and being the preferred brand for its customers.FromOur protective film and glass to cases, InvisibleShield products offer consumers a wide array of protection types and features, all with a limited lifetime warranty. In the third quarter of 2016 we announced InvisibleShield Glass+, designed to provide additional scratch resistance and impact protection over InvisibleShield Glass. Additionally, we launched InvisibleShield Sapphire Defense during the third quarter of 2016, which is a hybrid glass screen protector infused with sapphire crystals designed to provide premium screen protection.20and mobile power, and wireless charging brand with award-winning products designed to liberate mobile users from the limitations of mobile devices by providing more time to rock, talk, watch, game, surf, save, and send. Notably, the original juice pack® is designed to provide device-specific protection as well as additional battery power to many of the most popular mobile phones. mophie products are recognized for style and engineered for performance, providing a seamless integration of hardware, software, and design. In 2013, we began offering IFROGZ portable Bluetooth speakers for music lovers on the move that combine impressive audio quality, clever functionality, and eye-catching design. In the third quarter of 2016, we introduced a new family of wireless Bluetooth audio products designed to combine outstanding sound with a lightweight listening experience by alleviating bulky earbuds and heavy control modules. power management and social tech are designed to free consumers from the confines of the traditional workplace. We believe “getting away” shouldn’t mean being disconnected. We support the communicators, commuters, creators and closers who live a mobile lifestyle.2016.2017. There have been no material changes to the critical accounting policies or estimates previously disclosed in that report.21THREE MONTHS ENDED AND 2016 (amounts (in thousands, except per share data)2017,2018, were $115,227$118,565, compared to net sales of $99,833$115,227 for the three months ended June 30, 2016,2017, an increase of $15,394,$3,338, or 15%approximately 3%. The $3,338 increase in net sales comparingwas primarily attributable to (1) the six months ended June 30, 2017increase in sales of our power management products, specifically related to 2016 was attributed towireless charging accessories, and (2) increased sales of screen protection and power management products in key wireless and retail accounts, particularly in international markets.and 2016, was approximately: 2017 2016 Screen Protection 51 % 48 % Power Cases 19 % 23 % Power Management 17 % 12 % Keyboards 5 % 10 % Audio 7 % 6 % Other 1 % 1 % Three Months Ended June 30, 2018 June 30, 2017 Screen Protection 54 % 51 % Power Management 27 % 17 % Power Cases 7 % 19 % Keyboards 7 % 5 % Audio 4 % 7 % Other 1 % 1 % and 2016, was approximately: 2017 2016 Indirect channel 89 % 87 % Website 7 % 9 % Mall cart and kiosk program 4 % 4 % Three Months Ended June 30, 2018 June 30, 2017 Indirect channel 88 % 89 % Website 8 % 7 % Franchisees 4 % 4 % byrelated to our key geographic regionregions for the three months ended June 30, 2018 and 2017, and 2016, was approximately: 2017 2016 United States 87 % 90 % Europe 8 % 6 % Other 5 % 4 % Three Months Ended June 30, 2018 June 30, 2017 United States 85 % 87 % Europe 10 % 8 % Other 5 % 5 % 2017,2018, was $35,824,$37,657, or approximately 31%32% of net sales, as compared to $30,873,gross profit of $35,824, or approximately 31% of net sales for the three months ended June 30, 2016. Typically, the Company experiences higher2017. The increase in gross profit margin in periods whenwas primarily attributable to (1) the mix of screen protection products, increases. Although the mix of screen protection productsour highest margin product category, which increased during the second quarterthree months ended June 30, 2018, to approximately 54% of 2017 to 51% ofnet sales compared to 48%approximately 51% of net sales in 2016, sales of curved glass forduring the Samsung Galaxy S8 occurred at lower grossthree months ended June 30, 2017, and (2) improved margins than our other screen protection products, resulting in lower margins than we would otherwise see in periods of increased mix of screen protection sales. The margin impact from sales of curved glass was offset by improved mophie gross profit margins which increased year-over-year driven primarily by amortization expense from the acquisition-related fair value inventory write-up in 2016, which did not recur in 2017.Total operating2017,2018, were $30,327, a decrease$32,464, compared to operating expenses of $1,898, or 6%, from total operating expenses$30,327 for the three months ended June 30, 2016,2017, an increase of $32,225.$2,137, or approximately 7%. The $1,898 decrease$2,137 increase in operating expenses was primarily attributable to (1) synergies realized from cost reduction initiatives,increases in headcount to support additional growth of the Company, and (2) a reductionincreases in advertising and marketing spend, and (3) reduced amortization expense related to long-lived intangibles in the current year, which is based on estimated cash flows of the associated intangible assets.
spend.22Income (loss)We recognized income from operationsWe reported of $5,193 for the three months ended June 30, 2018, compared to income from operations of $5,497 for the three months ended June 30, 2017, a decrease of $304.a loss from operationsother expense of ($1,352)$552 for the three months ended June 30, 2016, an increase of $6,849.2017. The increase in income was primarily attributed to the increases in net sales and the reduction of operating expense items noted above.Other expenseFor the three months ended June 30, 2017, total other expense net was $552 comparedis primarily attributable to other expense, neta loss on foreign exchange transactions of $595approximately $681.2016.Income taxesWe recognized2018, compared to an income tax expenseprovision of $1,542 for the three months ended June 30, 2017, compared to an income2017. Our effective tax benefit of $901rate was 23% and 31% for the three months ended June 30, 2016. Our effective tax rate was 31.2%2018 and 46.3% for the three months ended June 30, 2017, and 2016, respectively. The decreasechange in the effective tax rate was due to several factors including but not limited to a change in the federal statutory rate from 35% to 21% and an increase to income in lower rate foreign jurisdictions in which the company experienced losses in the prior year.jurisdictions. The Company’s effective tax rate will generally differ from the U.S. Federal statutory rate of 35%21%, due to state taxes, permanent items, and the Company’s global tax strategy. (loss)As a result of these factors, we reported$3,403, or $0.12$3,215, with diluted earnings per share for the quarter ended June 30, 2017, compared to a net loss of ($1,046), or ($0.04) per share, for the quarter ended June 30, 2016.Segment InformationZAGG segment net sales$0.11 for the three months ended June 30, 2017, were $74,2592018, compared to net salesincome of $67,810$3,403, with diluted earnings per share of $0.12, for the three months ended June 30, 2016, an increase of $6,449, or 10%. The increase in net sales was largely due to an increase in screen protection and audio sales which were partially offset by a decline in keyboard sales due to overall softness in the tablet market compared to the prior year period.mophie segment net sales for the three2017.2017, were $40,968 compared to net sales of $32,023 for the three months ended June 30, 2016, an increase of $8,945, or 28%. The increase in net sales was largely due to an increase in power management sales during the quarter.ZAGG net income from operations totaled $9,177 for the three months ended June 30, 2017, compared to income from operations of $8,288 for the three months ended June 30, 2016, an increase of $889. The increase in income from operations for the ZAGG segment was due primarily to increases in sales primarily driven by screen protection.The net loss from operations for the mophie segment totaled ($3,680) for the three months ended June 30, 2017, compared to net loss from operations of ($9,640) for the three months ended June 30, 2016. The decreased loss in the mophie segment was primarily driven by strong sales of our power management products in 2017, a reduction in amortization expense from the acquisition-related fair value inventory write-up in 2016, which did not recur in 2017,2018 and a reduction in expenses related to salaries and professional fees.SIX MONTHS ENDED JUNE 30, 2017 AND 2016 (amounts 2017,2018, were $208,173$230,631, compared to net sales of $162,266$208,173 for the six months ended June 30, 2016,2017, an increase of $45,907,$22,458, or 28%approximately 11%. The $22,458 increase in net sales comparingwas primarily attributable to (1) the six months ended June 30, 2017 to 2016 was attributed to increasedincrease in sales of our power management products, specifically related to wireless charging accessories, and (2) increases in screen protection for new device releases during the current year as well has higherproducts in key wireless and retail accounts, particularly in international markets. These increases were partially offset by a decrease in sales of power management products. In addition, 2017 results include six months of mophie sales compared with four months in 2016.
cases.23and 2016, was approximately: 2017 2016 Screen Protection 49 % 54 % Power Cases 21 % 17 % Power Management 17 % 10 % Keyboards 6 % 11 % Audio 6 % 7 % Other 1 % 1 % Six Months Ended June 30, 2018 June 30, 2017 Screen Protection 52 % 49 % Power Management 30 % 17 % Power Cases 6 % 21 % Audio 5 % 6 % Keyboards 6 % 6 % Other 1 % 1 % and 2016, was approximately: 2017 2016 Indirect channel 88 % 86 % Website 9 % 9 % Mall cart and kiosk program 3 % 5 % Six Months Ended June 30, 2018 June 30, 2017 Indirect channel 88 % 88 % Website 8 % 9 % Franchisees 4 % 3 % byrelated to our key geographic regionregions for the six months ended June 30, 2018 and 2017, and 2016, was approximately: 2017 2016 United States 86 % 89 % Europe 8 % 7 % Other 6 % 4 % Six Months Ended June 30, 2018 June 30, 2017 United States 83 % 86 % Europe 10 % 8 % Other 7 % 6 % 2017,2018, was $75,250, or approximately 33% of net sales, compared to gross profit of $64,430, or approximately 31% of net sales, as compared to $54,602, or approximately 34% of net sales for the six months ended June 30, 2016.2017. The decreaseincrease in gross profit margin was primarily dueattributable to (1) a fullthe mix of screen protection products, our highest margin product category, which increased during the six months ended June 30, 2018, to approximately 52% of mophie operations in 2017, which are at lower gross profit margins than the corporate average, (2) lower gross profit margin on curved glass for the Samsung Galaxy S8,net sales compared to historical grossapproximately 49% of net sales during the six months ended June 30, 2017, and (2) improved margins on non-curved glass products and (3) these items were offset by amortization expense from the acquisition-related fair value inventory write-up in 2016, which did not recur in 2017.Total operating2017,2018, were $65,582, an increase of $5,925, or 10%, from total$62,138, compared to operating expenses for the six months ended June 30, 2016, of $59,657. The $5,925 increase was primarily attributable to (1) the inclusion of six months of mophie-related expenses for 2017 compared with four months in 2016, (2) the impairment of intangible asset related to an invalidated patent totaling $1,959, and (3) increased legal and travel expense. These increases were partially offset by the following reductions in operating expense: (1) synergies realized from cost reduction initiatives, (2) a reduction in transaction-related costs, (3) a reduction in advertising and marketing spend, and (4) an overall reduction in amortization expense.Income (loss) from operationsWe reported a loss from operations of ($1,152)$65,582 for the six months ended June 30, 2017, a decrease of $3,444, or approximately 5%. The $3,444 decrease in operating expenses was primarily attributable to (1) a $1,959 charge in 2017 related to the impairment of a patent that did not recur in 2018, and (2) operating expense synergies realized related to the mophie integration. These decreases in operating expense were partially offset by (1) increases in headcount to support additional growth of the Company and (2) increases in advertising and marketing spend.($5,055)$1,152 for the six months ended June 30, 2017, an increase of $14,264.2016, a decrease of $3,903.2017. The decrease in loss from operations was dueother expense is primarily attributable to a reduction of the mophie segment loss from operations from ($13,756) to ($11,368) and the other operatinginterest expense items discussed above. The decrease was also due to lower carrying amounts for the increase in net sales and gross profit, offset byCompany's debt.increase in operating expenses as noted above.Other expenseForincome tax provision of $1,835 for the six months ended June 30, 2017, total other expense, net was ($1,062)2018, compared to other expense, net of ($983) for the three months ended June 30, 2016. The increase in expense was primarily related to interest expense incurred on the higher debt levels compared to the prior period.24Income taxesWe recognizedan income tax expenseprovision of $521 for the six months ended June 30, 2017, compared to an income2017. Our effective tax benefit of $1,703rate was 15% and (24)% for the six months ended June 30, 2016. Our2018 and 2017, respectively. The change in the effective tax rate was (23.5%) and 28.2% fordue to several factors including but not limited to a change in the six months ended June 30,federal statutory rate from 35% to 21%, a change to book income in the second quarter of 2018 compared to a book loss in the second quarter of 2017, and 2016, respectively. The negative tax rate for the six-month period ended June 30, 2017, was duean increase to a discrete expense recognized during the first quarter related to the true-up of a deferred amount for stock compensation and close to break-even pre-tax book loss for the six months ended June 30, 2017. The rate was also affected by income infrom foreign jurisdictions that had losses in prior years.jurisdictions. The Company’s effective tax rate will generally differ from the U.S. Federal statutory rate of 35%21%, due to state taxes, permanent items, and the Company’s global tax strategy.lossAs a resultincome (loss)these factors, we reported a net loss of ($2,735), or ($0.10)$10,245, with diluted earnings per share of $0.36 for the six months ended June 30, 2017,2018, compared to a net loss of ($4,335), or ($0.16)$2,735, with diluted loss per share of $0.10, for the six months ended June 30, 2016.Segment InformationZAGG segment net sales for the six months ended June 30, 2017, were $131,424 compared to net sales of $122,607 for the six months ended June 30, 2016, an increase of $8,817, or 7%. The increase in net sales was largely due to an increase in screen protection and audio sales which were partially offset by a decline in keyboard sales due to overall softness in the tablet market compared to the prior year period.Net sales for the mophie segment for the six months ended June 30, 2017 were $76,749 compared to net sales of $39,659 for the six months ended June 30, 2016, an increase of 37,090, or 94%. The increase in net sales was driven by strong sales of our power management products in 2017 and the inclusion of six months of results for the period ended June 30, 2017, compared to four months of sales for the period ended June 30, 2016.ZAGG net income from operations totaled $10,216 for the six months ended June 30, 2017, compared to income from operations of $8,701 for the six months ended June 30, 2016, an increase of $1,515. The increase in income from operations for the ZAGG segment was due primarily to increases in sales primarily driven by screen protection.The net loss from operations for the mophie segment totaled ($11,368) for the period ended June 30, 2017, compared to net loss from operations of $(13,756) for the period ended June 30, 2016. The decreased loss in the mophie segment was primarily driven by strong sales of our power management products in 2017, a reduction in amortization expense from the acquisition-related fair value inventory write-up in 2016, which did not recur in 2017, and a reduction in expenses related to salaries and professional fees.thousands)2017,2018, our principal sources of liquidity were cash provided by operations, cash on hand, and the revolving credit facility. Our principal uses of cash have been cash used to reduce accounts payable balances, purchase of property and makefor (1) payments on the term and revolving credit facilities.increaseddecreased to $14,330$18,582 on June 30, 2017,2018, from $11,604$24,989 on December 31, 2016, an increase2017, a decrease of $2,726.$6,407. The increase in cashnet decrease was largelyprimarily attributable to (1) $17,538 net payments on the resultterm and revolving credit facilities, (2) $3,006 payments for treasury stock, (3) $2,701 from property and equipment purchases, and (4) $2,610 payments for the net share settlement of cash provided by operations from collections on accounts receivable balances and a reduction in inventory; these increases wererestricted stock. These expenditures are partially offset by paydowns of outstanding accounts payable balances, purchases of property plant and equipment and paydowns of debt outstanding. Earnings$19,957 generated from foreign operations are considered permanently re-invested and of the $14,330 cash balance on June 30, 2017, cash from foreign entities totaled $6,186, which constitutes 43% of the total cash and cash equivalents balance.$72,956$83,990 on June 30, 2017,2018, from $83,835$123,220 on December 31, 2016,2017, a decrease of $10,879.$39,230. The net decrease was dueprimarily attributable to comparatively lower sales for the second quarter of 2018 in comparison to the fourth quarter of 2017, as well as strong cash collections during the first six months of 2017.$65,376$69,662 on June 30, 2017,2018, from $72,769$75,046 on December 31, 2016,2017, a decrease of $7,393.$5,384. The net decrease was dueprimarily attributable to a reduction(1) improved operations management of inventory, and (2) seasonal fluctuations in inventory on hand, primarily drivenlevels. These decreases were partially offset by a reductionan increase in mophie-branded inventory.
inventory levels needed to support the wireless charging product line.25$62,237$60,372 on June 30, 2017,2018, from $85,022$96,472 on December 31, 2016,2017, a decrease of $22,785.$36,100. The net decrease was dueprimarily attributable to timingcomparatively lower sales for the second quarter of payments2018 in comparison to suppliers to supportthe fourth quarter 2016 sales.2017,2018, the Company had working capital $2,031 compared to negativea positive working capital of ($9,408)$71,316 compared to positive working capital of $43,210 as of December 31, 2016.2017, an increase of $28,106. The net increase in the working capital position was primarily relatedattributable to a reductionreductions in accounts payable and the shift of debt from current portion of long-term debt; the impact of these items were partially offset by a reduction in accounts receivable and inventories.Item 3.Quantitative and Qualitative Disclosures About Market Risk We invest our cash in money market funds, which are subject to minimal credit and market risk. We believe that the market risks associated with these financial instruments are immaterial, although there can be no guarantee that these market risks will be immaterial to us.Item 4.Controls and ProceduresUndersupervisionreports that it files or submits pursuant to the Securities Exchange Act of 1934, as amended, or Exchange Act, is recorded, processed, summarized and withreported within the participation oftime periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow for timely decisions regarding required disclosures.conductedcarried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as such term is defined under Rule 13a-15(e) promulgated underin accordance with the Exchange Act as of June 30, 2017.requirements. Based on thisupon that evaluation, our principal executive officer and principal financial officer concluded that as of the end of the period covered byof this Report,report, our disclosure controls and procedures are not effective due to the material weaknessesweakness described below.As a result of therelatedwhich resulted in an immaterial misstatement to a material overstatement of net sales, and accounts receivable, cost of goods sold, and inventory as of and for the year ended December 31, 2016, which2017 (which misstatement was corrected by management prior to issuance of the 20162017 consolidated financial statements in the Company’s Annual Report on Form 10-K,10-K), management has initiatedcontinued to implement the following changes to its internal controls during the six months endedas of June 30, 2017:●Conduct training regarding the design and operation2018: controls with those responsible for performing and reviewing the process level control activities over revenue, accounts receivable and in transit inventory.●Task the ZAGG operations team to identify information technology solutions that streamline the process for tracking and reporting orders shipped from China directly to customers.●Enhance the risk assessment process to consider significant changes in the business operations and the associated impact on financial reporting and internal controlsAlthough management believes our internal control over financial reporting has been, or is reasonably likelyreporting;be, materiallyidentify and positively affected byassess changes in the changes described above, a material weakness in ourbusiness that could significantly impact internal control over financial reporting continuesreporting;exist asthe growth of the Company; and2017. We are in2018, the process of implementingCompany has implemented several new cross functional processes and evaluating these changescontrols to remediateaddress the material weakness.Our disclosure controlsprocedures are designedcompliance and is subject to provide reasonable assurance of achieving their objectives. Nevertheless, an internallapses in judgment and breakdowns resulting from human failures. Internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system reflects the fact that there are resource constraints, and the benefits of controls are considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controlsover financial reporting also can be circumvented by the individual actscollusion or improper management override. Because of some persons,such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by collusion of two or more people, or by management overrideinternal control over financial reporting. However, these inherent limitations are known features of the internal control. Thefinancial reporting process. Therefore, it is possible to design of any system of controls also is based in part upon certain assumptions aboutinto the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
process safeguards to reduce, though not eliminate, this risk.26Item 1.Legal Proceedings11,9, “Commitments and Contingencies,” to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q, and are hereby incorporated by reference.Item 1A.Risk Factors20162017 (the “2016“2017 Form 10-K”), which could materially affect our business, financial condition or future results. These risk factors should be read carefully in connection with evaluating our business and in connection with the forward-looking statements contained in this Quarterly Report on Form 10-Q. Any of the risks described in the 20162017 Form 10-K could materially adversely affect our business, financial condition or future results and the actual outcome of matters as to which forward-looking statements are made. These are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results.Item 2.Unregistered Sales of Equity Securities and Use of Proceeds(dollars and shares in thousands)None.Period (a) Total Number of Shares Purchased (b) Average Price Paid per Share (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs April 1 - April 30, 2018 — $ — — $ 17,558 May 1 - May 31, 2018 — $ — — $ 17,558 June 1 - June 30, 2018 182 $ 16.49 182 $ 14,552 Item 3.Defaults Upon Senior SecuritiesItem 4.Mine Safety DisclosuresItem 5.Other InformationItem 6.Exhibitsa.Exhibits: The following Exhibits are filed with this Form 10-Q pursuant to Item 601(a) of Regulation S-K:Exhibit No.NumberDescription of Exhibit 31.132.2EX-101.INSCertification of Chief Financial Officer pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.EX-101.INSXBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document EX-101.SCH XBRL Taxonomy Extension Schema Document EX-101.CAL XBRL Taxonomy Extension Calculation Linkbase EX-101.DEF XBRL Taxonomy Extension Definition Linkbase EX-101.LAB XBRL Taxonomy Extension Labels Linkbase EX-101.PRE XBRL Taxonomy Extension Presentation Linkbase 27ZAGG INCZAGG INC Date: August 3, 2017/s/ RANDALL L. HALESDated: August 1, 2018 Randall L. Hales,/s/ CHRIS AHERNChris Ahern Chief Executive Officer President, & Director(Principal executive officer) Date:Dated: August 3, 20171, 2018/s/ BRADLEY J. HOLIDAY Bradley J. Holiday Chief Financial Officer (Principal financial officer) 28